SAT’s new rules on advance pricing arrangements reflect its new thinking on tax administration
On 11 October 2016, the State Administration of Taxation (SAT) issued the Public Notice on Matters Regarding Refining the Administration of Advance Pricing Arrangements (SAT Public Notice [2016] No. 64, hereinafter referred to as Public Notice 64” or the New Provisions”). Public Notice 64 provides the process and requirements for an enterprise to apply for an advance pricing arrangement (APA) as well as the criteria for an APA application to be prioritised or declined.

Public Notice 64 becomes effective from 1 December 2016 and replaces Chapter 6 Administration of Advance Pricing Arrangements (hereinafter referred to as the Original Provisions”) of the Implementation Measures of Special Tax Adjustment (Trail Version) (Guo Shui Fa [2009] No. 2, hereinafter referred to as Circular 2”), which shall be annulled on the same date.

According to Public Notice 64, the negotiation, signing and implementation process of an APA involve six stages: 1) the pre-filing meeting, 2) letter of intent, 3) analysis and evaluation, 4) formal application, 5) negotiation and signing, and 6) execution and monitoring. Compared with the Original Provisions, the New Provisions strengthen the tax authorities’ control over the APA process, and set higher standards on the enterprise’s compliance, cooperation, and information disclosure during the APA application process. An enterprise must obtain approval from the tax authorities before it can submit a letter of intent, and clear the analysis and evaluation process and obtain approval before it can submit the formal application.

The New Provisions have set higher standard for APA applications. Enterprises are required to prepare application packages in accordance with the new requirements, especially to include analyses which China tax authorities pay special attention to, such as the analysis of value chain and location specific advantages. An enterprise must actively cooperate with the tax authorities to perform required analyses, timely provide requested information, actively negotiate with tax authorities on the proposed transfer pricing method and adjust its proposal as necessary, in order for its application to receive expedited processing by the tax authorities.

The New Provisions have moved the analysis and evaluation stage before the formal application stage. This change may have limited impact on unilateral APA applications. For bilateral or multilateral APA applications, however, the impact may be more significant, as changes to an enterprise’s applications in China will affect its related parties’ application in other countries. The New Provisions require enterprises to agree to negotiate with the tax authorities and adjust their proposed transfer pricing methods as necessary during the analysis and evaluation stage, or their applications may not be accepted. Such a requirement presents challenges to the taxpayers and/or their related parties in managing their APA applications.

Public Notice 64 sets higher standards on the tax authorities’ monitoring of APA implementation and on enterprises’ actual operating results over the APA period. Enterprises that have APAs need to closely monitor the execution of their APAs. If the interquartile range is used in an APA, the enterprise will need to ensure not only its yearly result within the range, but also the weighted average result over the entire APA period to achieve at least the median level in order to avoid any impediment to the future renewal.

Public Notice 64 provides that enterprises having not received approval to submit formal applications before Public Notice 64 becomes effective will be subject to the New Provisions. This means that they would need to follow the new application procedure and document requirements as set out in Public Notice 64.